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This section was my workspace for philosophy essays between July 2006 and April 2008.
I call this "Prehistoric Kilroy" because it gave me practice for more
disciplined essays in Kilroy Cafe.Also see my philophical blog and Twitter feed.

Issue #20, 9/19/2006

The Investment Effect

By Glenn CampbellFamily Court Philosopher

As I watch some divorces unfold in court, I often
wonder: How could a relationship this bad have
gone on for so long?

The answer often involves a certain fallacy that
is common to investors everywhere. You see it all
the time in our fine casinos. A gambler has
already lost a huge amount of money on the slots
or roulette tables, but because they have already
"invested" so much, they feel compelled to
continue.

The more you have invested in a certain venture in
the past, be it a business, a marriage, a hobby or
even a personal opinion, the more you feel
compelled to "stay the course" to justify your
past investment. To "cut and run" seems like a
defeat, because it means that all of your prior
investments were useless.

Psychologists call this the "sunk-cost fallacy."
You have already "sunk" a substantial amount of
your resources into a project, and this creates an
ego-investment in the outcome that can cloud your
reasoning. To abandon the investment now would
result in a huge immediate hit to ones
self-esteem. Of course, the only problem with not
accepting the painful loss now is that you might
have to accept an even bigger loss later.

Psychologists, economists, social scientists and
statisticians would all agree that sunk-cost is a
"fallacy," a logical error in judgment. The fact
that you have already dropped $20,000 into the
slots has no effect whatsoever on the outcome of
the next try. Your odds of winning (or losing)
are exactly the same as they were on your very
first pull. The past $20,000 should be completely
irrelevant to your current decision-making, but
emotionally it still compels most suckers to keep
going.

I prefer to call this "the investment effect."
This is a mode of reasoning that effects all of
us, every day, and I contend that it is one of the
most powerful hidden forces in human behavior. We
do many things not because they are the wisest
decision right now, but because we have already
invested in this road and can't bear to turn
back.

This isn't just limited to obvious things like
marriage. It also affects attitudes, lifestyles
and emotional knee-jerk reactions. If you have
"invested" in anything, including foolish or
costly decisions of any kind, then there is a
pressure to continue with that policy to avoid
losing face about your past.

I think that people can even become invested in a
life of crime, precisely because of its cost. If
you steal a car, and you are caught and given a
punishment for it, then, if you are rational and
insightful, the punishment might deter you from
doing it in the future. However, for someone
whose ego is so weak that they can't admit they
were wrong, the high cost of the criminal activity
might actually justify its continuation. They
might say: "Why did I invest a year in jail? Was
it no use whatsoever? No, I'm going to continue
stealing cars, but I'm going to do it
better this time so I won't get caught."

The investment effect can shape ones political
opinions as well. Democrat or Republican, hawk or
dove  it often depends on what you have
already invested in personally.

As a young person not knowing what to do with your
life, you might decide on a whim to join the
military. That decision, once made, needs to be
continuously justified, probably for the rest of
your life. You go through basic training, which
isn't easy; you get yelled at and humiliated by
the drill sergeant, and when you come out of it,
yes, you do believe in the military, because how
else can you justify all the pain you have been
through?

Your decision to join the service, especially it
it was a hardship, becomes part of your personal
mythology. Henceforth, your political opinions and
your choices about your future will evolve in such
a way as to support your initial investment.

High-cost relationships, including marriage, are
certainly subject to the investment effect. If I
have already put 10 years of my life into a
relationship, then I am probably going to continue
with it, even if it is rather dull and
dysfunctional and I wouldn't choose it again.
"Look at all we have been through," can justify a
lot of bad partnerships.

The fact is, most people won't abandon existing
relationships that are dull and
unrewardingthat is, that are only mildly
dysfunctional. Instead, they require "cause"
before the relationship can end, and it may take
years before this cause becomes sufficient for
action.

The investment effect is so pervasive in human
decision-making that I hesitate to even call it a
"fallacy." It is "lifestyle decision." It is
something that we must accept in others and not
criticize. Certainly, if we did criticize the
investment-based decisions of our friends, they
would not be our friends for long.

But the sunk-cost fallacy is not something that
you are I should follow, enlightened beings that
we are. Every decision must be made on its own
merits, according to how the future costs and
benefits add up right now, regardless of the past
investment. If we must walk away from a $20,000
loss at the tables, so be it. The ability and
willingness to make such brutal choices are the
true test of wise decision-making.

Links

An article in the L.A. Times on 9/17/06 discusses
The
Sunk-Cost Fallacy, mostly in relation to the
Iraq war. It also defines the concept in general.

YOU'VE PAID $10 to get into the movie and it just
plain stinks. The plot is ridiculous, the acting
is terrible, the violence is excessive. But you've
already watched half of it. Do you sit through the
movie to the end or do you leave?

Just a month ago, you spent $2,000 getting your
10-year-old car's transmission rebuilt. Now you
find out the car is leaking oil and needs a ring
job. Do you spend the next thousand or buy a new
car?

You've been living with your romantic partner for
10 years. The relationship has had its ups and
downs, and both of you have invested a lot in
keeping it going. But every day it seems to
involve more work and less joy. Is it time to move
on?

You work for a private equity firm and personally
persuaded your skeptical partners to invest $2
million in a high-tech start-up. Now the chief
executive comes to see you with the news that
they've hit some snags in developing their
product, and they'll need at least another million
to bring it to market. Do you write the check?

We've all encountered situations like these. We
make a significant investment — of money, time or
emotion — in some project, relationship or
business deal, and it doesn't seem to be working
out. Do we continue to "throw good money after
bad" or do we "cut and run" and "stop wasting
time"? What's the right way to think about such
decisions?

Psychologists, decision scientists and economists
have an answer. They tell us that it's a mistake
to continue with a project or an activity because
of what you have already invested in it. The time
or money you've already spent is gone. You can't
reclaim it. Using a past investment to justify a
future investment is what they call the "sunk-cost
fallacy."

Instead of thinking about the past, what we should
be doing is thinking about the future. "Will my
life be better if I leave this terrible movie or
if I stay to the bitter end?" "Will my car give me
20,000 more trouble-free miles if I just do this
one last repair?" None of these questions have
sure answers. Life is full of uncertainty. But
what we can say is that if the reason for "staying
the course" is past commitment — sunk costs — we
need to find a better one....

We heard this argument often enough in the 1960s.
As casualties mounted in Vietnam, it became more
difficult to withdraw because withdrawal would
have "cheapened" the lives of those already
sacrificed. We "owed" it to the dead and wounded
to "stay the course." What staying the course
produced was thousands more dead and wounded.
"Knee deep in the big muddy" is how folk singer
Pete Seeger described it. The question should
never have been, "What have we invested so far?"
but "What are our objectives for the future and
can we attain them at a reasonable cost?"...

Yet people seem willing to waste even more (time,
money or lives) to justify what they have already
spent and avoid that sick feeling of failure.
Think about it. You haven't really lost money on a
stock whose share price keeps plummeting until
after you sell it. So you keep holding on, in the
hope that your judgment as an investor will
eventually be vindicated. And troops haven't
really "died in vain" as long as you continue to
press on in the fight, no matter how disastrous
the results.